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      Scope affirms Land of Berlin credit rating of AAA with Stable Outlook

      BERLI 1.350 08/13/27 BERLI 0.625 03/20/26 BERLI 2.445 02/12/38 BERLI 04/08/24 FRN BERLI 10/28/20 FRN BERLI 03/23/21 FRN BERLI 1.875 05/03/19 BERLI 0.375 10/28/19 BERLI 04/11/25 FRN BERLI 1.250 07/15/24 BERLI 5.550 09/15/28 BERLI 6.250 02/28/28 PUT BERLI 5.390 08/13/31 BERLI 0.050 09/24/20 BERLI 5.477 01/22/29 BERLI 0.250 04/22/25 BERLI 04/12/24 FRN BERLI 11/16/20 FRN BERLI 1.540 07/10/24 BERLI 1.550 07/29/25 BERLI 1.270 07/17/25 BERLI 1.550 09/10/29 BERLI 2.255 03/20/28 BERLI 10/14/19 FRN BERLI 1.375 06/05/37 BERLI 1.500 08/28/20 BERLI 04/12/30 FRN BERLI 1.250 08/06/18 BERLI 07/23/19 FRN BERLI 1.625 06/26/19 BERLI 02/04/21 FRN BERLI 0.925 08/07/25 BERLI 2.500 01/14/27 BERLI 0.900 03/10/26 BERLI 01/28/19 FRN BERLI 1.125 11/04/24 BERLI 1.525 11/05/29 BERLI 05/16/24 FRN BERLI 1.000 05/19/32 BERLI 07/28/25 FRN BERLI 04/18/19 FRN BERLI 10/28/19 FRN BERLI 4.125 07/26/19 BERLI 0.170 04/09/24 FRN BERLI 0.800 03/25/20 BERLI 04/01/25 FRN BERLI 0.050 12/14/18 BERLI 0.800 09/20/18 BERLI 3.125 08/17/21 BERLI 06/17/19 FRN BERLI 1.310 07/10/26 BERLI 1.500 01/21/21 BERLI 1.250 11/17/25 BERLI 1.370 10/20/27 BERLI 1.910 03/12/24 BERLI 1.000 06/26/19 BERLI 1.250 07/20/26 BERLI 0.625 02/08/27 BERLI 1.500 11/30/20 BERLI 0.900 09/20/18 BERLI 0.500 02/10/25 BERLI 1.440 08/12/24 BERLI 10/14/21 FRN BERLI 12/11/24 BERLI 2.875 06/11/19 BERLI 10/14/19 FRN BERLI 0.625 08/25/36 BERLI 10/14/24 FRN BERLI 1.625 08/14/20 BERLI 1.625 06/03/24 BERLI 08/05/20 FRN BERLI 2.200 06/03/24 BERLI 0.100 08/23/19 BERLI 03/14/19 FRN BERLI 01/27/25 FRN BERLI 0.800 09/27/19 BERLI 02/04/19 FRN BERLI 02/13/19 FRN BERLI 06/30/21 FRN BERLI 1.250 09/30/24 BERLI 0.500 06/19/47 BERLI 01/16/19 FRN BERLI 1.360 03/31/36 BERLI 1.100 08/15/24 BERLI 0.209 04/01/19 FRN BERLI 05/14/21 FRN BERLI 0.250 07/15/20 BERLI 0.600 09/24/19 BERLI 0.250 09/01/20 BERLI 0.166 07/14/26 FRN BERLI 0.070 06/05/19 BERLI 0.600 06/22/21 BERLI 0.600 03/23/21 BERLI 10/08/21 FRN BERLI 1.875 09/10/21 BERLI 0.800 09/12/18 BERLI 1.240 08/28/24 BERLI 1.250 05/14/21 BERLI 1.925 07/04/33 BERLI 07/13/18 FRN
      FRIDAY, 06/07/2018 - Scope Ratings GmbH
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      Scope affirms Land of Berlin credit rating of AAA with Stable Outlook

      Very supportive institutional framework, commitment to fiscal consolidation, downward debt trajectory and strong liquidity management support the rating. High legacy debt, limited financial flexibility and contingent liabilities remain challenges.

      Scope Ratings GmbH has today affirmed the Land of Berlin’s long-term issuer rating at AAA and short-term issuer rating at S-1+. The sub-sovereign’s senior unsecured debt is also affirmed at AAA. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

      For the detailed research report please click HERE.

      Rating drivers

      The AAA rating reflects the strong support for Berlin from the German institutional framework, a clear commitment to fiscal consolidation, the firm downward trajectory and favourable profile of the Land’s direct debt, as well as strong liquidity management. Challenges to the rating include legacy debt levels that remain high and limited fiscal flexibility which is mitigated in part by a growing proportion of more flexible capital expenditures. The Land of Berlin’s contingent liabilities are sizeable, but Scope believes they pose low risks to its balance sheet. The Stable Outlook reflects Scope’s assessment that risks for the Land of Berlin remain balanced.

      The Land of Berlin’s AAA rating is bolstered by a very supportive German institutional system with a very strong revenue equalisation mechanism, a legally tested extraordinary support mechanism, a safe and predictable cash management system designed to guarantee efficiency and liquidity at any point in time, and access to deep capital markets. It is Scope’s view that these factors align the credit profiles of the Länder and the federal government (the Bund, AAA, Stable Outlook).

      Following significant consolidation efforts, Berlin’s budgetary performance has improved substantially on past years of successive deficits. High operating surpluses averaging 14.2% of operating revenues from 2012-2017 (above the Länder average of 12.3%) enhanced Berlin’s ability not only to fund its operating expenses with operating revenue but also to realise extra revenue to cover interest payments and some capital expenditure. The Land’s balance before debt movement has remained in positive territory since 2012, supporting a gradual reduction of Berlin’s debt burden. In 2017, Berlin continued to demonstrate its fiscal commitment, also benefitting from sustained and strong tax revenue growth as well as greater fiscal room thanks to its solid track record of fiscal consolidation. Under the conservative medium-term financial plan for 2018-2021, Scope expects operating surpluses to decline slightly but to average 12.3% of operating revenues due to rising operating expenses and investments needed to address the city’s rapid growth and migration flows. Over the medium term, Scope expects the Land to maintain its prudent budgetary policy and adhere to its consolidation strategy.

      Scope views the Land of Berlin’s liquidity management as sound. The key elements of this management are comprehensive inter-year cash planning and the availability of numerous sources of liquidity, reflecting sophisticated state treasury and liquidity management. Additional continued access to liquidity to bridge intraday needs, if required, is available through credit facilities from major financial institutions. Further liquidity is also available from cash transactions between the German Länder, which place excess liquidity with each other, effectively acting as lenders, as well as mutual agreements between the Länder and the Bund in case of need during periods of stress.

      The Land of Berlin has a solid track record regarding access to capital markets. During the last financial crisis, access remained excellent, reflecting investor confidence in the German solidarity system. At the end of 2017, Berlin lengthened its weighted debt maturity to 7.6 years, up from 7.1 years at the end of 2016. Scope views the Land’s debt profile as favourable, with debt reductions in combination with excellent market access resulting in a low average cost of outstanding debt of 1.8% in 2017. Lower net interest payments have halved the burden on the budget to 4.9% of operating revenues in 2017, down from 9.6% in 2012.

      Berlin benefits from favourable economic and demographic trends. In 2017, Berlin's GDP expanded by 3.1%, outperforming the German average of 2.2%. Should growth continue to exceed the German average, the GDP-per-capita gap between the Land of Berlin and the German average will be further reduced. In addition, strong economic growth led to a reduction in the unemployment rate of the Land of Berlin, down to 9% in 2017 from 12.3% in 2012.

      Despite these strengths, Berlin faces several challenges. Berlin’s debt burden is very high by both national and international standards, despite the firm downward trend since 2010. Direct debt together with outstanding guarantees amounts to EUR 64.1bn or 240% of the Land’s operating revenue as of end-2017, slightly down from 257.7% at end-2016. The robust growth of operating revenues and thus positive balances before debt movements have enabled this downward trend. Scope expects this downward trend to continue, in keeping with the Land’s medium-term financial planning.

      The Land of Berlin also faces the challenge of limited fiscal flexibility. While Scope notes positively the rising proportion of overall capital expenditures, which increase fiscal flexibility, this flexibility remains constrained by the fact that most expenditures result from rigid personnel and transfer payments. In addition, due to the extensive shareholdings of the Land of Berlin, the high level of contingent liabilities is also a concern, which, however, is mitigated by the largely low-risk profiles of the companies that the Land of Berlin partially or wholly owns. Scope views positively the entities’ consolidated low leverage ratio of total liabilities to assets of 0.52. This ratio accounts for an increase in the consolidated debt of the major entities, excluding the regional promotional bank ‘Investitionsbank Berlin’, to EUR 16.5bn in 2017 from EUR 15.54bn in 2016. This increase is somewhat offset by the high level of assets, in part due to the Land’s shareholding in the real estate and housing sectors, which have experienced a rise in value.

      With the exception of the Berlin Brandenburg Airport, all major shareholding entities were profitable in 2017, which is reflected in a consolidated net surplus of EUR 0.59bn on a projected basis. The low and decreasing share of loss-making companies (in 2016, eight of 56 companies had negative results versus 10 in 2015) and good annual results overall, support sustained high levels of investment volume. It is Scope’s view that the associated companies fulfil a significant public-sector mandate for the Land of Berlin by contributing to the further development of Berlin’s dynamic growth, as well as strengthening the regional economy.

      Outlook and rating-change drivers

      The Stable Outlook reflects good visibility on the evolution of the very supportive German institutional framework and Scope’s expectation that Berlin’s government will keep to its fiscal consolidation programme and continue to place the Land’s debt on a firm downward trajectory over the medium term.

      The ratings could be downgraded if: i) the German sovereign rating were to be downgraded or ii) changes in the institutional framework resulted in notably weaker support.

      Rating committee

      The main points discussed during the rating committee were: i) the institutional framework; ii) fiscal flexibility; iii) Berlin’s economic structure; iv) debt and fiscal developments; v) the state of contingent liabilities, in particular the Bankgesellschaft transaction, the Berlin Brandenburg Airport and social housing association debt; vi) the activity of the Land’s investment fund SIWANA; and vii) international peers comparison.

      Methodology

      The methodology applicable for this rating and/or rating outlook Rating Methodology: Sub-Sovereign Rating, is available on www.scoperatings.com.

      Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on http://www.scoperatings.com.

      The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

      Regulatory disclosures

      This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
      Lead analyst Jakob Suwalski, Associate Director
      Person responsible for approval of the rating Karlo Fuchs, Executive Director/Head of Covered Bonds
      The ratings /outlook were first assigned by Scope in 14 July 2017.

      Solicitation, key sources and quality of information
      The rating was requested by the rated entity. The rated entity participated in the ratings process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity.
      The following material sources of information were used to prepare the credit rating: Senatsverwaltung für Finanzen Land Berlin, Bundesfinanzministerium, Statistisches Bundesamt, Haver. Key sources of information for the rating include: Historical figures on budget implementation, actual financial figures, budget for the next year and multi-year budget forecasts, historical outstanding debt, debt obligations and guarantees, list of sponsored entities, socio-economic statistics.
      Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

      Conditions of use / exclusion of liability
      © 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

      Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.

      BERLI 1.350 08/13/27 BERLI 0.625 03/20/26 BERLI 2.445 02/12/38 BERLI 04/08/24 FRN BERLI 10/28/20 FRN BERLI 03/23/21 FRN BERLI 1.875 05/03/19 BERLI 0.375 10/28/19 BERLI 04/11/25 FRN BERLI 1.250 07/15/24 BERLI 5.550 09/15/28 BERLI 6.250 02/28/28 PUT BERLI 5.390 08/13/31 BERLI 0.050 09/24/20 BERLI 5.477 01/22/29 BERLI 0.250 04/22/25 BERLI 04/12/24 FRN BERLI 11/16/20 FRN BERLI 1.540 07/10/24 BERLI 1.550 07/29/25 BERLI 1.270 07/17/25 BERLI 1.550 09/10/29 BERLI 2.255 03/20/28 BERLI 10/14/19 FRN BERLI 1.375 06/05/37 BERLI 1.500 08/28/20 BERLI 04/12/30 FRN BERLI 1.250 08/06/18 BERLI 07/23/19 FRN BERLI 1.625 06/26/19 BERLI 02/04/21 FRN BERLI 0.925 08/07/25 BERLI 2.500 01/14/27 BERLI 0.900 03/10/26 BERLI 01/28/19 FRN BERLI 1.125 11/04/24 BERLI 1.525 11/05/29 BERLI 05/16/24 FRN BERLI 1.000 05/19/32 BERLI 07/28/25 FRN BERLI 04/18/19 FRN BERLI 10/28/19 FRN BERLI 4.125 07/26/19 BERLI 0.170 04/09/24 FRN BERLI 0.800 03/25/20 BERLI 04/01/25 FRN BERLI 0.050 12/14/18 BERLI 0.800 09/20/18 BERLI 3.125 08/17/21 BERLI 06/17/19 FRN BERLI 1.310 07/10/26 BERLI 1.500 01/21/21 BERLI 1.250 11/17/25 BERLI 1.370 10/20/27 BERLI 1.910 03/12/24 BERLI 1.000 06/26/19 BERLI 1.250 07/20/26 BERLI 0.625 02/08/27 BERLI 1.500 11/30/20 BERLI 0.900 09/20/18 BERLI 0.500 02/10/25 BERLI 1.440 08/12/24 BERLI 10/14/21 FRN BERLI 12/11/24 BERLI 2.875 06/11/19 BERLI 10/14/19 FRN BERLI 0.625 08/25/36 BERLI 10/14/24 FRN BERLI 1.625 08/14/20 BERLI 1.625 06/03/24 BERLI 08/05/20 FRN BERLI 2.200 06/03/24 BERLI 0.100 08/23/19 BERLI 03/14/19 FRN BERLI 01/27/25 FRN BERLI 0.800 09/27/19 BERLI 02/04/19 FRN BERLI 02/13/19 FRN BERLI 06/30/21 FRN BERLI 1.250 09/30/24 BERLI 0.500 06/19/47 BERLI 01/16/19 FRN BERLI 1.360 03/31/36 BERLI 1.100 08/15/24 BERLI 0.209 04/01/19 FRN BERLI 05/14/21 FRN BERLI 0.250 07/15/20 BERLI 0.600 09/24/19 BERLI 0.250 09/01/20 BERLI 0.166 07/14/26 FRN BERLI 0.070 06/05/19 BERLI 0.600 06/22/21 BERLI 0.600 03/23/21 BERLI 10/08/21 FRN BERLI 1.875 09/10/21 BERLI 0.800 09/12/18 BERLI 1.240 08/28/24 BERLI 1.250 05/14/21 BERLI 1.925 07/04/33 BERLI 07/13/18 FRN

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